Inflation: Consumers fight back?

For once, a surprise in the opposite direction. City forecasters were expecting inflation to be broadly unchanged in March. Instead, the annual rate of inflation has fallen from 4.4% to 4% - thanks, in large part, to a 1.4% monthly fall in the price of food. There's also welcome news on the trade front: exports were 15% higher in the last three months than the same period last year.

With households so squeezed, it's been a puzzle how firms could pass on all these input price increases month after month. Taken alongside the bad news coming from retailers, today's figures might, just might, suggest that consumers are starting to say no.

However, the trend in inflation is still up: on the CPI measure, inflation averaged 3.4% in the last three months of 2010. The average for the first three months of 2011 has been 4.1%.

It's not just the Bank of England that's been taken by surprise by the level and persistence of inflation in the past few years - most City forecasters (and, as some of you delight in pointing out, Stephanomics) have been surprised as well. After all, inputs such as oil and other raw materials only represent a proportion of producers' costs. The cost of labour is usually much more important, and, until recently at least, wage costs were barely rising at all.

To Danny Gabay, of Fathom Consulting, the forecasting errors suggest that companies have been doing more than pass on increases in costs - they have also been using the opportunity to increase their margins - especially food retailers.

Two charts make the point: the first shows international retail food prices and UK prices.

The gap between the UK and the rest of the world in 2008 and 2009 is easily explained by the fall in the exchange rate. But you can't pin the more recent price rise on the currency - sterling has been stable or rising in most of this period.

The second chart shows recent trends in food retail and wholesale prices, and wages.

I'll let Danny Gabay make the point:

"For the retail sector as a whole, labour costs account for around 50% of the total cost base. Consequently, for a period where margins are stable, one would normally expect the green line showing increases in the retail price of food, to lie somewhere between the blue line, showing increases in the wholesale price of food, and the pink line, showing wage inflation in the retail sector as a whole. The fact that the retail price of food has, since the middle of last year, risen almost as much as the wholesale price of food at a time when wage inflation in the retail sector has been subdued, suggests to us that food retailers have been widening their margins."

These charts were created before today's figures came out. The fall in food prices in March may have changed the picture a little. But Bank of England economists have also puzzled over companies' ability to pass on price rises in such a subdued consumer environment. And the forecast for the next few months is still that the headline rate of inflation will go up.

Some point to the incentives facing managers in big corporations these days - which might encourage them to protect margins more zealously than the volume of sales. If so, that could be bad news for the economy, because it would suggest that it will take longer for inflation to work its way back to target than it might have done in the past - even when there is a considerable amount of slack in the economy. The fear would then be that we would only be able to get inflation back to 2% target with a prolonged period of sub-trend growth, which would itself be bad news for our long-term potential because some of our idle capacity would be lost forever.

We shall see. For the moment, consumers can take some good cheer from the reminder that inflation, like share prices, can go down as well as up.

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MUMBAI | NEW DELHI: Prices for most groceries, household and personal care products will remain unchanged for at least six to eight weeks after the goods and services tax is put in place on July 1 as companies aren't too sure how the new levy will impact their cost of operations. Several products including cookies, toothpastes, soaps and hair oils will be taxed at 18% under GST compared with about 22% in the current indirect tax structure of excise duty and value-added tax. However, detergents, shampoos and skincare products will attract a higher 28% levy.

It was below the 1.1 per cent predicted by economists, who said sterling’s fall would push the number higher, reports The BBC.
But prices for goods leaving factories rose by 2.1 per cent, faster than expected and the biggest increase since April 2012.
Costs faced by producers for raw material and oil showed a record monthly jump in October, up by 4.6 per cent.

I suspect a good many people would be surprised to learn that, if you abstract from volatile energy prices, consumer price inflation in the U.S. has been running at an annualized rate of 2.0% for the past 10 and 20 years. In fact, the CPI ex-energy is up 2.1% in the 12 months ended February and it has even risen at a 2.3% annualized rate over the past six months and 2.5% over the past three months. Inflation is far from dead, and the deflation concerns you've heard about in recent years are all the by-product of collapsing energy prices, which, by the way, are now a thing of the past.

OTTAWA — The Canadian dollar hit its strongest level since January on Friday after a surprise jump in domestic inflation and strong retail sales data.
The pace of Canada’s annual rate of inflation quickened in March, as higher food costs countered lower gas prices at the pumps — supporting the Bank of Canada’s view that price increases could stay near its target.
The consumer price index rose 1.2 per cent last month, Statistic Canada said Friday, above the one-per-cent forecast of most economists.

WASHINGTON — The number of Americans buying new homes plummeted in March to the slowest pace in eight months, a sign that real estate’s spring buying season is off to a weak start.
The Commerce Department said Wednesday that sales of new homes declined 14.5% last month to a seasonally adjusted annual rate of 384,000. That was the second straight monthly decline and the lowest rate since July 2013.
Sales plunged in the Midwest, South and West in March. But they rebounded in the Northeast, where snowstorms in previous months curtailed purchases.

The gold-mining industry, which has underperformed the precious metal for each of the past six years, is pledging to report costs more accurately as part of its efforts to win back investor confidence.
Barrick Gold Corp. and Goldcorp Inc., the two biggest producers by market value, have begun reporting “all-in sustaining costs” for the first time. The new measure averaged $941 an ounce between the two companies in the fourth quarter. That’s 50 percent higher than the $626 average so-called cash cost they disclosed in the preceding three months.

Inflation has surprised everyone again. Is it a problem? The best guess is: probably not. But the judgement is more finely balanced than the Bank of England would probably want, in an economy with so much spare capacity.
The best medicine for the UK - and its public finances - right now is economic growth. The Monetary Policy Committee does not want to have to crimp that growth due to keep the lid on inflation.